At the quarterly performance review meeting of public sector banks on Wednesday, Finance Minister P. Chidambaram termed their growing non-performing assets (NPAs) as their “biggest challenge” and urged them to focus on recovery. In the past, Chidambaram has pointed out that the NPA crisis will be mitigated once growth picks up. In so far as the revival of growth will make it easier for stressed companies to sell their assets, and improve their top lines, the finance minister is right. But it could be several quarters before the economy returns to a robust growth path. Meanwhile, though the RBI’s provisioning rules for restructured loans and its efforts to tackle potentially bad assets before they become “non performing” are welcome first steps, it needs to revisit its norms in order to encourage sick assets to be sold and taken over so that corporate balance sheets can be cleaned up and the investment cycle can be kickstarted.
It is clear from the fact that stressed loans — including gross NPAs and restructured debt — are 12.61 per cent of gross advances for public sector banks that this is indeed their biggest challenge. This is up from 11.02 per cent at the start of this fiscal. The proportion of stressed assets for some banks is truly alarming. For instance, 19.75 per cent of the Central Bank of India’s loans are stressed. In the case of the United Bank of India, the government is contemplating an infusion of Rs 800 crore as equity, due to its staggering NPAs, which stand at 10.8 per cent. Clearly, someone has been asleep at the wheel for things to have got this bad.
While the RBI’s group exposure norms and its attempt to systematically detect potentially problematic loans early on — by mandating banks to class a loan as a specially mentioned account if the borrower is late on repayment by less than 30 days, and set up a joint lenders forum and negotiate a restructuring package if repayment is delayed by over 31 days — are much needed, it must go further. The only way the toxicity can be expunged from the system is by enabling and empowering banks to sell bad assets.